The following discussion is intended to assist you in understanding our business
and the results of our operations. It should be read in conjunction with the
Condensed Consolidated Financial Statements and the related notes that appear
elsewhere in this report as well as our Report on Form 10-K filed with the
Securities and Exchange Commission on April 15, 2021. Certain statements made in
our discussion may be forward looking. Forward-looking statements involve risks
and uncertainties and a number of factors could cause actual results or outcomes
to differ materially from our expectations. These risks, uncertainties, and
other factors include, among others, the risks described in our Annual Report on
Form 10-K filed with the Securities and Exchange Commission, as well as other
risks described in this Quarterly Report. Unless the context requires otherwise,
when we refer to "we," "us" and "our," we are describing Strategic Environmental
& Energy Resources, Inc. and its consolidated subsidiaries on a consolidated
basis.
SEER BUSINESS OVERVIEW
Strategic Environmental & Energy Resources, Inc. ("the Company" or "SEER") was
originally organized under the laws of the State of Nevada on February 13, 2002
for the purpose of acquiring one or more businesses, under the name of Satellite
Organizing Solutions, Inc. ("SOZG"). In January 2008, SOZG changed its name to
Strategic Environmental & Energy Resources, Inc., reduced its number of
outstanding shares through a reverse stock split and consummated the acquisition
of both, REGS, LLC and Tactical Cleaning Company, LLC. SEER is dedicated to
assembling complementary service and environmental, clean-technology businesses
that provide safe, innovative, cost effective, and profitable solutions in the
environmental, waste management and renewable energy industries. SEER currently
operates five companies with four offices in the western and mid-western U.S.
Through these operating companies, SEER provides products and services
throughout the U.S. and has licensed and owned technologies with many customer
installations throughout the U.S. Each of the five operating companies is
discussed in more detail below. The Company also has non-controlling interests
in joint ventures, some of which have no or minimal operations.
The Company's domestic strategy is to grow internally through SEER's
subsidiaries that have well established revenue streams and, simultaneously,
establish long-term alliances with and/or acquire complementary domestic
businesses in rapidly growing markets for renewable energy, waste and water
treatment and industrial services. The focus of the SEER family of companies,
however, is to increase margins by securing or developing proprietary patented
and patent-pending technologies and then leveraging its 20 plus-year service
experience to place these innovations and solutions into the growing markets of
emission capture and control, renewable "green gas" capture and sale, compressed
natural gas fuel generation, as well as general solid waste and
medical/pharmaceutical waste destruction. Many of SEER's current operating
companies share customer bases and each provides synergistic services,
technologies and products.
The company now owns and manages four operating entities and two entities that
have no significant operations to date.
Subsidiaries
Wholly owned
REGS, LLC d/b/a Resource Environmental Group Services ("REGS"): (operating since
1994) designs and manufactures environmental systems and provides general
industrial cleaning services and waste management consulting to many industry
sectors. During the fourth quarter of 2019, the Company ceased bidding on, and
accepting contracts for the services division of its REGS subsidiary. The
results from the subsidiary are included in discontinued operations for the
years ended 2019 and 2018. No contracts have been uncompleted relating to the
services division; therefore, the services division did not have any performance
obligations as of December 31, 2019, nor thereafter. Fifteen employees in the
division were terminated as of December 31, 2019. After the industrial cleaning
services division was discontinued as of 2019, REGS continued with its
manufacturing and assembly operations during 2020 and into 2021. These
operations consisted primarily of building kilns and related equipment. As of
September 2021, the company expects to wind down REGS for all purposes and cease
all operations.
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MV, LLC (d/b/a MV Technologies), ("MV"): (operating since 2003) MV designs and
sells patented and/or proprietary, dry scrubber solutions for management of
Hydrogen Sulfide (H2S) in biogas, landfill gas, and petroleum processing
operations. These system solutions are marketed under the product names H2SPlus™
and OdorFilter™. The markets for these products include land fill operations,
agricultural and food product processors, wastewater treatment facilities, and
petroleum product refiners. MV also develops and designs proprietary
technologies and systems used to condition biogas for use as renewable natural
gas ("RNG"), for a number of applications, such as transportation fuel and
natural gas pipeline injection.
SEER Environmental Materials, LLC ("SEM"): (formed September 2015) is a wholly
owned subsidiary established as a materials technology business with the purpose
of developing advanced chemical absorbents and catalysts that enhance the
capability of biogas produced from, landfill, wastewater treatment operations
and agricultural digester operations.
Majority owned
Paragon Waste Solutions, LLC ("PWS"): (formed late 2010) PWS is an operating
company that has developed a patented waste destruction technology using a
pyrolytic heating process combined with "non-thermal plasma" assisted oxidation.
This technique involves gasification of solid waste by heating the waste in a
low-oxygen environment, followed by complete oxidation at higher temperatures in
the presence of plasma. The term "non-thermal plasma" refers to a low energy
ionized gas that is generated by electrical discharges between two electrodes.
This technology, commercially referred to as CoronaLux™, is designed and
intended for the "clean" destruction of hazardous chemical and biological waste
(i.e., hospital "red bag" waste) thereby eliminating the need for costly
segregation, transportation, incineration or landfill (with their associated
legacy liabilities). PWS is a 54% owned subsidiary.
PelleChar, LLC ("PelleChar"): (formed September 2018) owned 51% by SEER.
PelleChar has secured third-party pellet manufacturing capabilities from one of
the nation's premier pellet manufacturers. Working closely with Biochar Now,
LLC, PelleChar commenced sales in 2019 of its proprietary pellets containing the
proven and superior Biochar Now product starting with the landscaping and big
agriculture markets. At this time, PelleChar is the only company able to offer a
soil amendment pellet containing the Biochar Now product that is produced using
the patented pyrolytic process. PelleChar activity to date relates to startup of
operations, and an increasing sales effort. Revenue and expenses of PelleChar
were not material for the six months ended June 30, 2021.
Joint Ventures
Paragon Waste (UK) Ltd: In June 2014, PWS and PCI Consulting Ltd ("PCI") formed
Paragon Waste (UK) Ltd ("Paragon UK Joint Venture") to develop, permit and
exploit the PWS waste destruction technology within the territory of Ireland and
the United Kingdom. PWS and PCI each own 50% of the voting shares of Paragon UK
Joint Venture. Operations to date of the Paragon UK Joint Venture have been
limited to formation, the delivery of a CoronaLux™ unit with a third party in
the United Kingdom and application and permitting efforts with regulatory
entities.
P&P Company: In February 2015, PWS and Particle Science Tech of Environmental
Protection, Inc. ("Particle Science") formed a joint venture, Particle & Paragon
Environmental Solutions, Inc ("P&P") to exploit the PWS technology in China,
including Hong Kong, Macao and Taiwan. PWS and Particle Science each own 50% of
P&P. Operations to date have been limited to formation of P&P and the sale and
delivery of a CoronaLux™ unit to Particle Science in China.
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PWS MWS Joint Venture: In October 2014, PWS and Medical Waste Services, LLC
("MWS") formed a contractual joint venture to exploit the PWS medical waste
destruction technology. In 2015, MWS licensed and installed a CoronaLux™ unit at
an MWS facility, and subsequently received a limited permit to operate from the
South Coast Air Quality Management District ("SCAQMD") and the California
Department of Public Health. In November 2017, PWS received final air quality
permit approval from SCAQMD allowing for full operations of the CoronaLux™ unit
at the MWS facility.
Paragon Southwest Joint Venture: In December 2017, PWS and GulfWest Waste
Solutions, LLC ("GWWS") formed Paragon Southwest Medical Waste, LLC ("PSMW") to
exploit the PWS medical waste destruction technology. PSMW will have an
exclusive license to the CoronaLux™ technology in a six-state area of the
Southern United States. In addition to the equity position, PWS will be the
operating partner for the business and intends to sell a number of additional
systems to the joint venture. In 2017, PSMW purchased and installed three
CoronaLux™ units at an PSMW facility.
SEER's Financial Condition and Liquidity
As shown in the accompanying consolidated financial statements, the Company has
experienced recurring losses, and has accumulated a deficit of approximately
$30.6 million as of June 30, 2021, and $29.7 million as of December 31, 2020.
For the six months ended June 30, 2021, and 2020 we had net losses from
continuing operations before adjustment for losses attributable to
non-controlling interest of approximately $1.0 million and $1.3 million,
respectively. As of both June 30, 2021, and December 31, 2020, our current
liabilities exceed our current assets by approximately $9.8 million. The primary
reason for that working capital deficit did not increase from December 31, 2020,
to June 30, 2021, is due to a net increase in COVID-19 related stimulus related
payroll tax credits. The Company has limited common shares available for issue
which may limit the ability to raise capital or settle debt through issuance of
shares. These factors raise substantial doubt about the ability of the Company
to continue to operate as a going concern for a period of at least one year
after the date of the issuance of our audited financial statements for the
period ended June 30, 2021.
Realization of a major portion of our assets as of June 30, 2021, is dependent
upon our continued operations. The Company is dependent on generating additional
revenue or obtaining adequate capital to fund operating losses until it becomes
profitable. In addition, we have undertaken a number of specific steps to
continue to operate as a going concern. We continue to focus on developing
organic growth in our operating companies, diversifying our service customer
base and market concentrations and improving gross and net margins through
increased attention to pricing, aggressive cost management and overhead
reductions, including discontinuing a line of business with insufficient
margins. Critical to achieving profitability will be our ability to license and
or sell, permit and operate through our joint ventures and licensees our
CoronaLux™ waste destruction units. We have increased our business development
focus to address opportunities identified in domestic markets attributable to
increased federal and state emission control regulations and a growing demand
for energy conservation and renewable energies. In addition, the Company is
evaluating various forms of financing that may be available to it. There can be
no assurance that the Company will secure additional financing for working
capital on favorable terms or at all, increase revenues and achieve the desired
result of net income and positive cash flow from operations in future years.
These financial statements do not give any effect to any adjustments that would
be necessary should the Company be unable to report on a going concern basis.
Results of Operations for the Three Months Ended June 30, 2021, and 2020
Total revenues were $0.9 million and $0.8 million for the three months ended
June 30, 2021, and 2020, respectively. The increase of approximately $0.1
million or 16% in revenues comparing the three months ended June 30, 2021, to
the three months ended June 30, 2020, is attributable to the increases in
revenues from our products segment revenue, which includes our environmental
solutions segment, which increased from approximately $0.7 million for the three
months ended June 30, 2020, to approximately $0.9 million for the three months
ended June 30, 2021, an increase of approximately $0.1 million or approximately
17%. Environmental solutions segment generated more revenue as activity
increased in our construction contracts, due to the relieving of a general
slowdown in the economy attributable to the COVID-19 pandemic the prior year
period.
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Operating expenses, which include cost of products, cost of solid waste and
general and administrative (G&A) expenses, and salaries and related expenses,
were approximately $1.4 million for the three months ended June 30, 2021,
compared to $1.2 million for the three months ended June 30, 2020. The increase
primarily consists of an increase in product costs of approximately $0.2
million, as a result of increased activity in our construction contracts. The
activity has increased from the COVID-19 related slowdown that commenced in the
second quarter of 2020.
Total non-operating expense, net was $0.2 million for the three months ended
June 30, 2021, which remained consistent with the three months ended June 30,
2020. The primary cost in non-operating expenses was interest, which was
consistent with the second quarter of 2020, at $0.2 million.
There is no provision for income taxes for both the three months ended June 30,
2021, and 2020, due to our net losses for both periods and we continue to
maintain full allowances covering our net deferred tax benefits as of June 30,
2021, and 2020.
Net loss, before non-controlling interest, for the three months ended June 30,
2021, was $639,900 compared to a net loss, before non-controlling interest, of
$601,200 for the three months ended June 30, 2020. The net loss attributable to
SEER after deducting $28,400 for the non-controlling interest was $611,500 for
the three months ended June 30, 2021, as compared to $563,200, after deducting
$38,000 in non-controlling interest, for the three months ended June 30, 2020.
As noted above, an increase in operating expenses during 2021 of 15%, offset by
an increase in revenue of 16%, was the primary reason for the increase in the
net loss.
Results of Operations for the Six Months Ended June 30, 2021, and 2020
Total revenues were $1.8 million and $1.6 million for the six months ended June
30, 2021, and 2020, respectively. The increase of approximately $0.2 million or
14% in revenues comparing the six months ended June 30, 2021, to the six months
ended June 30, 2020, is attributable to the increases in revenues from our
products segment revenue, which includes our environmental solutions segment,
which increased from $1.5 million for the six months ended June 30, 2020, to
$1.7 million for the six months ended June 30, 2021, an increase of
approximately $0.2 million, or approximately 15%. Environmental solutions
segment generated more revenue as 10 internally built kilns were delivered
during the first quarter of 2021, and activity increased in our construction
contracts, due to the relieving of a general slowdown in the economy
attributable to the COVID-19 pandemic the prior year period.
Operating expenses, which include cost of products, cost of solid waste and
general and administrative (G&A) expenses, and salaries and related expenses,
were approximately $2.5 million for the six months ended June 30, 2021, compared
to $2.7 million for the six months ended June 31, 2020. The decrease primarily
consists of a decrease in general and administrative costs of approximately $0.1
million, as a result of reduced professional fees during the six months ended,
and a reduction in salaries and related of approximately $0.3 million due to the
Employee Retention Tax Credit ("ERTC") program from the U.S Treasury, as part of
the COVID-19 stimulus package. The ERTC program refunds a portion of taxes paid
for payroll. This was partially offset by higher costs of products as we
recognized more costs related to our construction contracts, due to the
relieving of a general slowdown in the economy attributable to the COVID-19
pandemic the prior year period.
Total non-operating other expense, net was $0.3 million for the six months ended
June 30, 2021, compared to $0.2 million for the six months ended June 30, 2020.
The increase in expense in 2021 compared to 2020 is primarily due to the reduced
other income, which in 2020 included a larger gain on the sale of fixed assets.
There is no provision for income taxes for both the six months ended June 30,
2021, and 2020, due to our net losses for both periods and we continue to
maintain full allowances covering our net deferred tax benefits as of June 31,
2021, and 2020.
Net loss, before non-controlling interest, for the six months ended June 30,
2021, was $1.0 million compared to a net loss, before non-controlling interest,
of $1.3 million for the six months ended June 30, 2020. The net loss
attributable to SEER after deducting $41,200 for the non-controlling interest
was $0.9 million for the six months ended June 30, 2021, as compared to $1.2
million, after deducting $65,300 in non-controlling interest, for the six months
ended June 30, 2020. As noted above, a decrease in operating expenses during
2021 of 5%, an increase in revenue of 14%, offset by increase in non-operating
expenses, was the primary reason for the decrease in the net loss.
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Changes in Cash Flow
Operating Activities
The Company had consistent net cash used by operating activities for the six
months ended June 30, 2021, and 2020 of $0.8 million. Cash used by operating
activities is driven by our net loss and adjusted by non-cash items as well as
changes in operating assets and liabilities. Non-cash adjustments primarily
include depreciation, amortization of intangible assets, stock-based
compensation expense, provision for bad debt, and non-cash interest expense. Net
loss decreased for the six months ended June 30, 2021, by approximately $0.3
million. Non-cash adjustments increased cash flows $25,800 for the six months
ended June 30, 2021, compared to increasing cash flows $194,800 for the six
months ended June 30, 2020. Depreciation and amortization totaled $69,200 during
first half of 2021 compared to $90,000 in the first half of 2020, non-cash
expense for interest was $74,700 in the first half of 2020, and $0 in the first
half of 2021, and gain on disposal of fixed assets was $81,400 in the first half
of 2021, and $0 in the first half of 2020. In addition to the non-cash
adjustments to net income, changes in assets and liabilities include: a) changes
in account receivable used approximately $0.2 million in cash in the first half
of 2021, compared to providing $0.4 million in the first half of 2020, a net
decrease in cash of approximately $0.5 million, b) changes in billings in excess
of revenue on uncompleted contracts provided approximately $0.3 million in the
first half of 2021, compared to use of $2,000 in the first half of 2020, a net
increase in cash of approximately $0.3 million, c) changes in costs in excess of
billings on uncompleted contracts provided $6,800 in the first half of 2021,
compared to using $0.1 million in the first half of 2020, a net increase in cash
of approximately $0.2 million, d) changes in deferred revenue used $16,500 in
the first half of 2021, compared to providing $67,700 in the first half of 2020,
a net decrease in cash of $0.1 million.
Investing activities
Net cash provided by investing activities was $78,400 for the six months ended
June 30, 2021, compared to using $131,600 of cash for the six months ended June
30, 2020. The purchase of property and equipment was $3,000 for the six months
ended June 30, 2021, and $131,600 for the six months ended June 30, 2020. The
proceeds from sale of fixed assets totaled $81,400 for the six months ended June
30, 2021, while $0 for the six months ended June 30, 2020.
Financing Activities
Net cash provided by financing activities was approximately $0.9 million for the
six months ended June 30, 2021, compared to approximately $0.7 million for the
six months ended June 30, 2020. The net of proceeds and payments related to debt
of approximately $0.7 million in the six months ended June 30, 2021, compared to
approximately $0.1 million in the six months ended June 30, 2020, and the net
proceeds related to paycheck protection program of approximately $0.1 in the six
months ended June 30, 2021, compared to approximately $0.6 million in the six
months ended June 30, 2020.
Critical Accounting Policies, Judgments and Estimates
Use of Estimates
The preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States (U.S. GAAP)
requires management to make a number of estimates and assumptions related to the
reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the period. Significant
items subject to such estimates and assumptions include the carrying amount of
intangible assets; valuation allowances and reserves for receivables, inventory
and deferred income taxes; revenue recognition related to contracts accounted
for under the percentage of completion method; share-based compensation; and
loss contingencies, including those related to litigation. Actual results could
differ from those estimates.
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Accounts Receivable and Concentration of Credit Risk
Accounts receivable are recorded at the invoiced amounts less an allowance for
doubtful accounts and do not bear interest. The allowance for doubtful accounts
is based on our estimate of the amount of probable credit losses in our accounts
receivable. We determine the allowance for doubtful accounts based upon an aging
of accounts receivable, historical experience and management judgment. Accounts
receivable balances are reviewed individually for collectability, and balances
are charged off against the allowance when we determine that the potential for
recovery is remote. An allowance for doubtful accounts of approximately $800 and
$11,800 has been reserved as of June 30, 2021, and December 31, 2020,
respectively.
The Company is exposed to credit risk in the normal course of business,
primarily related to accounts receivable. Our customers operate primarily in the
biogas generating and wastewater treatment industries in the United States.
Accordingly, we are affected by the economic conditions in these industries as
well as general economic conditions in the United States. To limit credit risk,
management periodically reviews and evaluates the financial condition of its
customers and maintains an allowance for doubtful accounts. As of June 30, 2021,
and December 31, 2020, we do not believe that we have significant credit risk.
Fair Value of Financial Instruments
The carrying amounts of our financial instruments, including accounts receivable
and accounts payable, are carried at cost, which approximates their fair value
due to their short-term maturities. We believe that the carrying value of notes
payable with third parties, including their current portion, approximate their
fair value, as those instruments carry market interest rates based on our
current financial condition and liquidity. We believe the amounts due to related
parties also approximate their fair value, as their carried interest rates are
consistent with those of our notes payable with third parties.
Long-lived Assets
The Company evaluates the carrying value of long-lived assets for impairment on
an annual basis or whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable. An asset is considered to be impaired
when the anticipated undiscounted future cash flows of an asset group are
estimated to be less than its carrying value. The amount of impairment
recognized is the difference between the carrying value of the asset group and
its fair value. Fair value estimates are based on assumptions concerning the
amount and timing of estimated future cash flows. No impairments were determined
as of June 30, 2021.
Revenue Recognition
Revenue is recognized under FASB guidelines, which requires an evaluation of
revenue arrangements with customers following a five-step approach: (1) identify
the contract with a customer; (2) identify the performance obligations in the
contract; (3) determine the transaction price; (4) allocate the transaction
price to the performance obligations; and (5) recognize revenue when (or as) the
company satisfies each performance obligation. Revenues are recognized when
control of the promised services are transferred to the customers in an amount
that reflects the expected consideration in exchange for those services. A
customer obtains control when it has the ability to direct the use of and obtain
the benefits from the services. Other major provisions of the guidance include
capitalization of certain contract costs, consideration of the time value of
money in the transaction price and allowing estimates of variable consideration
to be recognized before contingencies are resolved in certain circumstances. The
guidance also requires enhanced disclosures regarding the nature, amount, timing
and uncertainty of revenue and cash flows arising from contracts with customers.
Stock-based Compensation
We account for stock-based awards at fair value on the date of grant and
recognize compensation over the service period that they are expected to vest.
We estimate the fair value of stock options and stock purchase warrants using
the Black-Scholes option pricing model. The estimated value of the portion of a
stock-based award that is ultimately expected to vest, taking into consideration
estimated forfeitures, is recognized as expense over the requisite service
periods. The estimate of stock awards that will ultimately vest requires
judgment, and to the extent that actual forfeitures differ from estimated
forfeitures, such differences are accounted for as a cumulative adjustment to
compensation expenses and recorded in the period that estimates are revised.
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